Costco, Whole Foods to 'intensify' retail competition

By Dave Larsen

Courtesy of the Associated Press

October 24, 2012

The Dayton-area shopping landscape will see increased competition and higher retail lease rates with the arrival of the region’s first Costco Wholesale and Whole Foods Market stores, but a grocery price war appears unlikely, a local expert said.

The two major national retailers earlier this month announced plans to open stores in the Dayton area that will employ around 400 people total. Neither company has yet announced an opening date for the stores.

Costco Wholesale Corp. submitted plans to build a member’s-only retail warehouse at the planned Cornerstone of Centerville development near Wilmington Pike and Feedwire Road. Whole Foods Market Inc. announced they have signed a lease for a new store at the intersection of McEwen Road and Miamisburg-Centerville Road (Ohio 725) in Washington Twp.

“This is definitely going to intensify competition,” said Serdar Durmusoglu, a University of Dayton associate professor of marketing.

The new stores are positive news for the area, which will benefit from new jobs and advertising revenues, Durmusoglu said. “It tells us the Dayton area certainly is not declining,” he said.

Whole Foods has a reputation for locating stores in areas that are likely to grow, industry experts said. Two studies in recent years, including one by Citigroup, found that the “Whole Foods Effect” on surrounding real estate often included a 10 to 20 percent rise in property values.

Durmusoglu said Whole Foods’ opening in Washington Twp. will have a similar impact on that area, making its a more desirable location by offering “an exciting new shopping experience.”

The upscale natural and organic foods retailer is likely to increase area home prices and boost sales, he said. In addition, retail landlords might increase lease rates because of higher customer traffic in that area.

Median household income in the Washington Twp. area is $80,000 to $85,000, which is in line with Whole Foods’ strategy of locating in areas with upper median incomes, Durmusoglu said.

Costco customers’ average annual income is $74,000, according to a 2012 Saint Mary’s University of Minnesota report. The company targets college-educated households with two or more people, the report said.

Durmusoglu said household income in the area of the planned Costco store in Centerville is about $70,000 to $75,000.

Both retailers appear to have selected their local sites well, according to Durmusoglu’s analysis.

The Whole Foods store in Washington Twp. won’t located be near any direct competitors such as Kroger, Dorothy Lane Market or Earth Fare, he said.

Costco’s store in Centerville will be located about eight miles from competitor Sam’s Club’s retail warehouses in both Beavercreek and Washington Twp. Consequently, Wilmington Pike-area residents might choose to shop at Costco.

“It looks like those Sam’s Clubs stores are going to bleed a little bit,” Durmusoglu said.

Costco and Sam’s Club are both membership-based retailers that offer low prices on a limited selection of products in a broad range of merchandise categories in no-frills, self-service warehouse facilities. Members at both retailers pay fees up to $110 per year to shop at their clubs and online.

Durmusoglu said area Sam’s Club members in the coming years could see reduced fees and other perks such as the extension of expired membership accounts as that retailer fights to maintain its existing customers.

Costco has an 87 percent membership renewal rate. “That means once they go to Costco, chances are they’re not coming back,” he said.

A 2011 National Bureau of Economic Research study found that Costco’s arrival in a new market often causes local competitors to raise their grocery prices by 1.4 percent in the short term and 2.7 percent in the long term, particularly in cities with small populations and high grocery store densities. Existing grocers can’t compete with Costco on price, so they focus on less price-sensitive customers by offering experience and convenience, the report said.

Durmusoglu doesn’t expect to see a price war among area grocery retailers.

“The target segments are so clearly identified right now that nobody is actually going into anybody’s turf with reduced prices,” he said. Instead, retailers are likely to compete by offering improved customer service, Durmusoglu said.

Whole Foods Market Inc.

• Headquarters: Austin, Texas

• Operates 355 stores in 40 U.S. states, including seven in Ohio, plus the U.K. and Canada.

• Net sales of about $12 billion in fiscal year 2012.

• 53,100 full-time employees

• www.wholefoodsmarket.com

Costco Wholesale Corp.

• Headquarters: Issaquah, Wash.

• Operates 638 warehouses, including 454 in the United States and Puerto Rico, with five stores in Ohio.